NIC INC. This section should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Form 10-K.
CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K regardingNIC Inc. and its subsidiaries (referred to herein as "the Company", "NIC", "we", "our" or "us") and its business, which are not current or historical facts, are "forward-looking statements" that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements of plans and objectives, statements of future economic performance or financial projections, statements regarding the planned implementation of new contracts and new projects under existing contracts, the expected length of contract terms, statements relating to our business plans, objectives and expected operating results, statements relating to our expected effective tax rate, statements relating to possible future dividends and share repurchases, statements regarding the expected effects of changes in accounting standards, statements of assumptions underlying such statements, statements related to the ongoing effects the COVID-19 pandemic is expected to have on our business and financial results, including statements related to the duration, profitability and unsatisfied performance obligations of our COVID-19 testing solution, and statements of our intentions, hopes, beliefs, expectations, or predictions of the future. For example, statements like we "expect," we "believe," we "plan," we "intend," or we "anticipate" are forward-looking statements. Investors should be aware that our actual operating results and financial performance may differ materially from our expressed expectations because of risks and uncertainties about the future including those risks discussed in this 2020 Annual Report on Form 10-K. There are a number of important factors that could cause actual results to differ materially from those suggested or indicated by such forward-looking statements. These include, among others, our success in renewing existing contracts and in signing contracts with new states and with federal and state government agencies; our ability to successfully increase the adoption and use of digital government services; the possibility of security breaches or disruptions through cyber-attacks or other events and any resulting liability; our ability to implement new contracts and any related technology enhancements in a timely and cost effective manner; the possibility of reductions in fees or revenues as a result of budget deficits, government shutdowns, or changes in government policy; continued favorable government legislation; acceptance of digital government services by businesses and citizens; our ability to identify and acquire suitable acquisition candidates and to successfully integrate any acquired businesses; competition; general economic conditions; and the ongoing effects the COVID-19 pandemic is expected to have on our business and financial results, including statements relating to the duration, profitability and unsatisfied performance obligations of strategic initiatives developed in response to COVID-19, as well as on our government agency partners, workforce and citizen consumers, as discussed under "CAUTIONS ABOUT FORWARD LOOKING STATEMENTS" in Part I and "RISK FACTORS" in Part I, Item 1A of this 2020 Annual Report on Form 10-K. Investors should read all of these discussions of risks carefully. All forward-looking statements made in this Annual Report on Form 10-K speak only as of the date of this report. Except as may be required by law, we will not update the information in this 2020 Annual Report on Form 10-K if any forward-looking statement later turns out to be inaccurate. Investors are cautioned not to put undue reliance on any forward-looking statement.
OVERVIEW OF OUR BUSINESS MODEL
We are a leading provider of digital government services and payment solutions
that help governments use technology to provide a higher level of service to
businesses and citizens and increase efficiencies. We accomplish this through
two channels: our state enterprise businesses and our software & services
businesses.
In our state enterprise businesses, we generally enter into contracts with state
and local governments to design, build, and operate digital government services
and payment solutions on an enterprise-wide basis on their behalf. We typically
enter into multi-year contracts and manage operations for each government
partner through separate local subsidiaries that operate as decentralized
businesses with a high degree of autonomy. The digital services that we build
allow businesses and citizens to access government information through multiple
channels and complete secure transactions and
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payments. We are typically responsible for funding the up-front development and
ongoing operations and maintenance costs of the digital government services. Our
unique business model allows us to generate revenues by sharing in the
transaction fees collected from digital government services and payment
transactions. Our government partners benefit because they reduce their
financial and technological risks, increase their operational efficiencies, and
gain a centralized, customer-focused presence on the internet, while businesses
and citizens gain a faster, more convenient, and more cost-effective means to
interact with governments.
On behalf of our government partners, we enter into statements of work with
various agencies and divisions of the government to provide specific services
and to conduct specific transactions. These statements of work establish
preliminary pricing of the online transactions and data access services we
provide and the division of revenues between us and the government agency. The
government oversight authority must approve prices and revenue sharing
agreements. We have limited control over the level of transaction fees we are
permitted to retain. Any changes made to the amount or percentage of transaction
fees retained by us, or to the amounts charged for the services offered, could
materially affect the profitability of the respective contract. We typically own
all the intellectual property related to the applications developed under these
contracts. After completion of a defined contract term or upon termination for
cause, the government partner typically receives a perpetual, royalty-free
license to use the applications and digital government services we built only in
its own state. However, certain enterprise applications and proprietary customer
management, billing, payment processing or other applications that we have
developed and standardized centrally are provided to our government partners on
a SaaS basis, and thus would not be included in any royalty-free license. If our
contract expires after a defined term or if our contract is terminated by our
government partner for cause, the government agency would be entitled to take
over the owned or licensed applications in place, and NIC would have no future
revenue from, or obligation to, such former government partner, except as
otherwise provided in the contract.
Most of our state enterprise revenues are generated from transaction-based
services for interactive government services ("IGS") and driver history records
("DHR"), which represented approximately 63% and 26% of state enterprise
revenues in 2020, respectively. These transaction-based revenues are highly
correlated to state population but are also affected by pricing policies
established by government entities for public records, the number and growth of
commercial enterprises, and the government entity's development of policy and
information technology infrastructure supporting digital government. In 2020,
transaction-based revenues consisted of approximately 65% business-to-government
transactions and 35% citizen-to-government transactions.
The highest volume service we offer in the state enterprise business is digital
access to DHRs. This service accounted for approximately 19%, 26% and 29% of our
total consolidated revenues in 2020, 2019 and 2018, respectively. We currently
believe that while this service will continue to be an important source of
revenue, its contribution as a percentage of total consolidated revenues will
decline modestly over time as other sources grow. In addition, in several of our
states we offer interactive government services for online motor vehicle
registration and licensing. This service accounted for approximately 11%, 11%
and 14% of our total consolidated revenues in 2020, 2019 and 2018, respectively.
A primary source of revenue is derived from data resellers, such as LexisNexis
Risk Solutions , which have entered into contracts with our government partners
to request DHR records from the various states with which we have contracts.
Under the terms of these contracts, our government partners have us provide data
resellers with access to retrieve driver history records. For each state, the
fee per record is the same for all entities that access DHR records. We
generally earn a fixed-fee based on the number of requests processed for the
government partner. LexisNexis Risk Solutions , which resells these records to
the auto insurance industry, accounted for approximately 11%, 15% and 19% of our
total consolidated revenues in 2020, 2019 and 2018, respectively. Data reseller
contracts are generally self-renewing until canceled by one side or the other,
and generally may be terminated at any time after a 30-day notice. Furthermore,
these contracts are immediately terminable if the state statute allowing for the
public release of these records is repealed.
We charge for digital access to government services based on usage and,
depending upon government policies, also on a fixed or sliding scale bulk basis.
Our fees are set by negotiation with the government agencies that control the
records or services and are typically approved by a government sanctioned
oversight authority. Generally, our contracts outline the total fee to be paid
by the end-user consumer, as well as our share of the fee. We have limited
control over the level of fees we are permitted to retain. We recognize revenues
from transactions (primarily information access fees and filing fees) as we
provide access to applications and process transactions initiated by end-user
consumers. We bill certain end-user consumers, including high-volume DHR data
resellers to the auto insurance industry, monthly. We typically receive
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most payments within 25 days of billing and remit payment to governments within
30 to 45 days of the transaction. The gross fees that we collect on behalf of
government agencies for data access are accrued as accounts receivable and
accounts payable at the time revenue from the access of public information is
recognized. We typically must remit a certain amount or percentage of these fees
to government agencies regardless of whether we ultimately collect the fees. The
pricing of transactions varies by the type of transaction and by state.
Our state enterprise businesses also provide non-recurring application
development services for our government partners on either a time and materials
or fixed-fee basis and generally recognize revenues over time as services are
provided. Development services revenues represented approximately 10% of state
enterprise revenues in 2020. Fixed-fee services for our government partner in
the state of Indiana represented approximately 1% of state enterprise revenues
in 2020.
In our software & services businesses, we provide certain payment processing
services, software development and digital
government services, other than those provided on an enterprise-wide basis, to
federal agencies, as well as state and local
governments. Generally, our software & services contracts include SaaS
contracts, payment processing contracts and, to a lesser degree, software
development contracts. In August 2020 , we began offering new rapid and secure
COVID-19 testing solution TourHealth, featuring digital engagement, assessment
and scheduling, as well as in-person clinical testing and logistics. This
service accounted for approximately 13% of our total consolidated revenues in
2020.
Our objective is to strengthen our position as the leading provider of digital government services. Key strategies to achieve this objective include:
•Renew all current contracts: First and foremost, we strive to renew all currently profitable government contracts. We currently have 11 contracts under which we provide enterprise-wide digital government services, as well as our contract with the FMCSA, that have expiration dates within the 12-month period followingDecember 31, 2020 . For additional information on our current government contracts, please refer to Note 3, Outsourced Government Contracts, of this Annual Report on Form 10-K. •Win new contracts: A key objective of ours is to win new contracts with federal, state and local government agencies. We continue to invest heavily in business development and marketing efforts, including a combination of strategic advertising and public relations initiatives. We have responded to several procurement opportunities and realized significant benefits from our investments, including contracts with new government partners in recent years. Our goal is to continue expanding our number of government partners by leveraging our strong relationships with current government partners and our reputation for providing proven digital government services. Our expansion efforts include developing relationships and sponsors throughout an individual government entity, pursuing strategic technology alliances, making presentations at conferences of government executives with responsibility for information technology policy and developing contacts with organizations that act as forums for discussions between these executives. •Increase transactional revenues from our existing businesses: Part of our strategy is to increase transactional revenues from our existing contracts by building new applications and services, taking successful applications and services and implementing them in other states and increasing the adoption of existing applications and services within each state where we operate. We intend to accomplish this with new service offerings, increased operational focus and expanded marketing initiatives. In addition, we will work closely with the governance authority for each of our government partners to evaluate the pricing of new and existing services to encourage higher usage and increase revenue streams. We plan to continue our development of new secure online transactional services that enable government agencies to interact more effectively and efficiently with businesses, citizens and other government agencies through multiple online channels, including mobile. We will continue to work with government agencies, professional associations and other organizations to better understand the current and future needs of end-user consumers. We will continue to work with our government partners to create awareness of the online alternatives to traditional government interactions through initiatives such as informational brochures and inclusion of website information on government communication materials. In addition, we will continue to update our partners and end-user consumers to highlight new government service information. We plan to work with professional associations to directly and indirectly communicate to their members the potential convenience, ease of use and other benefits of the services we offer on behalf of our government partners. 31 -------------------------------------------------------------------------------- •Continue to grow profitability: In addition to driving revenue growth for new and existing contracts, part of our strategy is to increase profitability by driving cost efficiency efforts throughout our Company that fosters entrepreneurial decision-making and innovation and accentuates the potential financial leverage of our business model.
REVENUES
We classify our revenues into two primary categories: (1) state enterprise and (2) software & services. Each of these categories are described below:
State Enterprise Revenues: We earn revenues from our subsidiaries operating enterprise-wide state contracts to provide digital government services to multiple government agencies. We categorize our state enterprise revenues into three main sources: transaction-based fees, development services and fixed-fee services. Transaction-based revenues and fixed-fee revenues are generally recurring while development revenues are generally non-recurring. An important financial metric that we use to gauge our success in increasing revenues in our existing state enterprise businesses is same state revenue growth. We define same state revenues as revenues from states under contract and generating comparable revenues for two full comparable periods. Our long-term goal is to grow same state revenues at our historical average of more than 8% per year. Each revenue source is further described below:
•Transaction-based:
?IGS: fees from a wide variety of interactive government services, other than digital access to motor vehicle driver history records, for transactions conducted by businesses and end-user consumers. For a representative listing of the IGS applications we currently offer through our state enterprise businesses in conjunction with our government partners, refer to Part I, Item 1 in this Annual Report on Form 10-K. As IGS revenues continue to become a larger component of overall state enterprise revenues, our growth in same state IGS revenues becomes more important to our overall growth. ?DHR: fees from driver history records for providing data resellers, insurance companies, and other pre-authorized customers digital access to state motor vehicle driver history records on behalf of our state partners. Absent price increases, same state DHR revenue growth has historically ranged from flat to 4% per year. •Development Services: revenues from the performance of software development projects and other time and materials services for our government partners. While we actively market these services, they do not have the same degree of predictability as our transaction-based or fixed-fee services. •Fixed-Fee Services: our state enterprise business inIndiana earns fixed-fees from the performance of digital government services for numerous government agencies. Software & Services Revenues: We earn revenues from our businesses that provide software development and digital government services, other than those services provided under state enterprise contracts, to federal agencies as well as state and local governments. Our Software & Services revenues are primarily transaction-based and classified as Payments, Federal, TourHealth and Other. Each of these revenue types is further described below: •Payments: primarily transaction-based fees from contracts with state and local governments for payment processing-related, transaction-based services that are not part of an enterprise-wide state contract. The majority of revenues from these sources are generally recurring. •Federal: primarily transaction-based, fees from contracts with certain Federal agencies inthe United States , including the FMCSA, to manage the PSP and transaction-based revenues we earn as a subcontractor to Booz Allen Hamilton on its Recreation.gov contract. The majority of our Federal revenues are generally recurring under the respective contracts. •TourHealth: a combination of fixed-fee and per test-based fees from contracts pertaining to our new TourHealth solution, which utilizes our citizen-engagement technology platform, Gov2Go®, to provide rapid and secure COVID-19 testing. TourHealth commenced operations and began to generate revenues in August 32 -------------------------------------------------------------------------------- 2020 and has contracted for testing services with certain government entities extending into the first quarter of 2021. It is possible services will continue beyond the first quarter of 2021 depending on the severity and duration of the pandemic and the testing needs of states, correctional facilities and higher education institutions across the US. •Other: primarily implementation and SaaS subscription revenues from our RxGov prescription drug monitoring business and our recently acquiredNIC Licensing Solutions regulatory licensing business. The majority of revenues from these sources are recurring. OPERATING EXPENSES The primary categories of operating expenses include: cost of revenues, selling & administrative, enterprise technology & product support, and depreciation & amortization. Each of these categories are described below:
Cost of Revenues: Consists of all direct costs associated with providing digital government services and payment solutions for both our state enterprise and software & services businesses and excludes depreciation & amortization. We categorize cost of revenues between fixed and variable costs:
•Fixed costs: include costs such as employee compensation and benefits
(including stock-based compensation), subcontractor labor and other costs,
telecommunications costs, provision for losses on accounts receivable, and all
other costs associated with the provision of dedicated client service such as
dedicated office facilities.
•Variable costs: fluctuate with the level of revenues and primarily include
interchange fees required to process credit/debit card transactions, bank fees
to process automated clearinghouse transactions and, to a much lesser extent,
costs associated with revenue share arrangements with certain state partners. A
significant percentage of our transaction-based revenues are generated from
online applications whereby users pay for information or transactions via
credit/debit cards. We typically earn a portion of the credit/debit card
transaction amount, but also must pay an associated interchange fee to the
financial institution that processes the credit/debit card transaction. We earn
a lower incremental gross profit percentage on these transactions as compared to
our DHR and other IGS transactions. However, we plan to continue to implement
these services because they are needed by our government partners and they
contribute favorably to our operating income growth.
Selling & Administrative: This category consists primarily of corporate-level
expenses (including all forms of compensation and benefits) relating to market
development and sales, marketing, human resource management, corporate
communications and public relations, administration, legal, finance and
accounting, internal audit and other non-customer service-related costs.
Enterprise Technology & Product Support: This category consists primarily of
corporate-level expenses (including all forms of compensation and benefits) for
our information technology, product development and security teams that support
our centrally hosted data center infrastructure and centrally developed SaaS
payment processing solutions, government agency SaaS products, including outdoor
recreation, healthcare and regulatory licensing, and other SaaS platform
solutions, including our citizen-centric Gov2Go® enterprise platform and
enterprise microservices and internal development platforms.
Depreciation & Amortization: This category consists of depreciation of fixed
assets and amortization of both internally developed software and intangible
assets purchased as part of acquisitions.
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--------------------------------------------------------------------------------CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain estimates and assumptions involved in the application of generally accepted accounting principles have a material impact on our reported financial condition and operating performance and on the comparability of such reported information over different reporting periods. A critical accounting policy is one which is both important and material to the portrayal of our financial condition and results of operations and requires management's most difficult, subjective or complex judgments, often because of the need to make estimates and assumptions about the effect of matters that are inherently uncertain. There are other items within our financial statements that require management to make estimates and assumptions, but are not deemed critical, that may affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's application of accounting policies. Those significant accounting policies and recent accounting pronouncements not yet adopted are described in Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements.
NOVEL CORONAVIRUS DISEASE 19 ("COVID-19")
We are monitoring the ongoing COVID-19 pandemic and have been actively working with our government partners to assist them with the impact. As the outbreak progressed inthe United States in 2020 and the vast majority of states issued stay-at-home orders, starting mostly in the latter part of March and continuing through April and most of May, we saw a decrease in volumes for certain services we operate on behalf of our government partners, including driver history record services and interactive government services, the federal Pre-Employment Screening Program we operate on behalf of theDepartment of Transportation Federal Motor Carrier Safety Administration , and the federal Recreation.gov outdoor recreation service we operate as a subcontractor in conjunction with Booz Allen Hamilton, among other services. We also saw a shift from certain in-person, over-the-counter transactions conducted in brick-and-mortar government offices, many of which were temporarily closed, to those we manage digitally online for our government agency partners. In addition, we saw several government agency partners extend deadlines 60 to 90 days for certain required filings and renewals. These actions negatively impacted the volume of transaction we processed and the amount of revenues we recognized for many services in March and throughout the second quarter of 2020. However, we saw an improvement in volumes for many services starting in late May and continuing throughout the third and fourth quarters of 2020 as stay-at-home orders were lifted, federal parks reopened and extensions for certain required filings and renewals expired. In addition, we recently launched a new service offering, TourHealth, which utilizes our technology to provide a rapid and secure solution for COVID-19 testing. In the second half of 2020, TourHealth provided testing services for the states ofFlorida ,South Carolina andKansas as well as theAlabama Department of Corrections and theUniversity of Mississippi , which positively impacted our financial results for the year. We currently anticipate the COVID-19 pandemic may have a prolonged negative impact on broader economic conditions inthe United States , which may impact our results of operations in the future. While we have not incurred any significant disruptions to our business activities or services resulting from the pandemic, we have temporarily restricted all business travel, closed all Company offices and shifted to remote operations for an indefinite period to ensure social distancing and the health and safety of our employees. We believe we are currently operating efficiently and continue to effectively manage the overall impact of the pandemic on our business with a remote workforce. We are actively monitoring the situation and are assessing further possible implications to our business and we will continue to take aggressive actions to mitigate potential adverse consequences, such as operational contingency planning and testing, key personnel succession planning, enhanced employee and government partner communication protocols, travel restrictions and cost containment efforts to buffer potential future revenue declines. See "RISK FACTORS" in Part I, Item 1A of this 2020 Annual Report on Form 10-K for additional discussion regarding the risks associated with the COVID-19 pandemic and those risks related to a prolonged economic slowdown, among other risk factors. 34 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
In this section, we are providing more detailed information about our operating results and changes in financial position over the past three years. This section should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Form 10-K.
Total Revenues
In the table below, we have categorized our revenue by the two main categories included in the consolidated statements of income, with the corresponding percentage change from the prior year period:
2020 vs 2019 2019 vs 2018
(dollar amounts in
thousands) 2020 2019 2018 $ Change % $ Change %
State enterprise revenues$ 331,720 $ 290,281 $ 312,492 $ 41,439 14 %$ (22,211) (7) % Software & services revenues 128,734 63,924 32,408 64,810 101 % 31,516 97 % Total 460,454 354,205 344,900 106,249 30 % 9,305 3 % Recurring revenues as a % of total revenues 80% 97% 96% State enterprise revenues In the table below, we have categorized our state enterprise revenues according to the underlying source of revenue, with the corresponding percentage change from the prior year period: 2020 vs 2019 2019 vs 2018 (dollar amounts in thousands) 2020 2019 2018 $ Change % $ Change % IGS transaction-based$ 209,903 $ 183,987 $ 195,155 $ 25,916 14 %$ (11,168) (6) % DHR transaction-based 85,337 91,059 100,241 (5,722) (6) % (9,182) (9) % Development services 31,530 10,285 12,146 21,245 207 % (1,861) (15) % Fixed-fee services 4,950 4,950 4,950 - - % - - % Total$ 331,720 $ 290,281 $ 312,492 $ 41,439 14 %$ (22,211) (7) % The following table summarizes key same-state revenue metrics for our state enterprise revenues. The results of theIllinois contract were excluded from the same-state category for all periods presented. For both 2019 and 2018, results of the legacyTexas contract were excluded from the same-state category because they did not generate comparable revenues for two full comparable periods. 2020 2019 2018 Same-state IGS revenue growth 14 % 16 % 11 % Same-state DHR revenue growth (decline) (6) % 3 % 3 %
Same-state revenue growth - other services* 136 % 1 % 15 % Same-state revenue growth - total
14 % 10 % 9 %
* Represents the combined revenue growth from development services and fixed-fee services.
State enterprise revenues for 2020 increased 14% from 2019 driven by same state
growth. The 14% increase in same-state revenues for 2020 was mainly due to
higher revenues in
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including the new motor vehicle titling and registration service in Wisconsin ,
strong demand for hunting and fishing licensing services in several states and
an increase in payment processing revenues in New Jersey , among other services.
In addition, the pandemic and the need to socially distance pushed more
businesses and citizens online to interact with governments digitally, instead
of in government offices, which increased the usage of many digital services we
manage on behalf of our government partners. Same-state DHR revenues declined 6%
in 2020 due to lower revenues across several states as a result of the impact of
COVID-19 on the auto insurance industry and associated data resellers.
Same-state revenue growth for other services increased 136% in 2020 primarily
due to pandemic unemployment services provided in the Commonwealth of Virginia ,
which totaled $19.6 million for the year.
State enterprise revenues for 2019 declined 7% from 2018, mainly due to a $49.0
million decrease in revenues from the legacy Texas contract, which expired on
August 31, 2018 , partially offset by a 10%, or $27.3 million , increase in same
state revenues. The 10% increase in same-state revenues for 2019 was mainly due
to higher revenues in New Jersey , Indiana and Colorado , among other states.
Same-state IGS revenues increased 16% in 2019 driven in part by higher payment
processing volumes in New Jersey and Indiana and higher revenues from motor
vehicle renewals in Colorado , among other services. Same-state DHR revenues grew
3% in 2019, mainly due to higher volumes across several states.
Software & services revenues
In the analysis below, we have categorized our software & services revenues among Payments, Federal, TourHealth and Other, with the corresponding percentage change from the prior year period.
2020 vs 2019 2019 vs 2018
(dollar amounts in
thousands) 2020 2019 2018 $ Change % $ Change %
Payments $ 41,092 $ 37,976 $ 10,936 $ 3,116 8% $ 27,040 247%
Federal 20,799 22,019 19,813 (1,220) (6)% 2,206 11%
TourHealth 61,634 - - 61,634 N/A - N/A
Other 5,209 3,929 1,659 1,280 33% 2,270 137%
Total $ 128,734 $ 63,924 $ 32,408 $ 64,810 101% $ 31,516 97%
Software & services revenues in 2020 increased $64.8 million , or 101%, over
2019, primarily driven by $61.6 million in revenues from our TourHealth COVID-19
testing solution, which commenced in August 2020 , and provided testing services
to the states of Florida , South Carolina and Kansas as well as the Alabama
Department of Corrections and the University of Mississippi . The increase in
software & services revenues was also driven by higher volumes in our Payments
business, primarily in the state of Texas . Federal revenues decreased 6% in 2020
driven mainly by a 13% decline in revenues from our contract with the FMCSA to
operate the PSP resulting from the COVID-19 pandemic, partially offset by a 45%
increase in revenues from Recreation.gov as many federal parks reopened and
experienced an influx of visitors after stay-at-home orders instituted in the
early months of the pandemic were lifted starting in June 2020 .
Software & services revenues in 2019 increased $31.5 million , or 97%, over 2018,
primarily driven by our new Texas payments business, which commenced on
September 1, 2018 . The increase was also driven by Recreation.gov, which
launched on October 1, 2018 , and higher volumes from the PSP service. Other
software & services revenues increased mainly due to our acquired RxGov
prescription drug monitoring solution (acquired in 2018) and licensing solutions
business (acquired in 2019).
State Enterprise Cost of Revenues
In the table below, we have categorized our state enterprise cost of revenues
between fixed and variable costs, with the corresponding percentage change from
the prior year period:
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2020 vs 2019 2019 vs 2018
(dollar amounts in
thousands) 2020 2019 2018 $ Change % $ Change %
Fixed costs $ 115,802 $ 98,754 $ 108,229 $ 17,048 17 % $ (9,475) (9) %
Variable costs 84,099 76,736 79,092 7,363 10 % (2,356) (3) %
Total $ 199,901 $ 175,490 $ 187,321 $ 24,411 14 % $ (11,831) (6) %
Cost of state enterprise revenues in 2020 increased $24.4 million , or 14%, over
2019 due mainly to a 15% or approximately $24.9 million , increase in same state
costs. The increase in same state costs in 2020 was primarily attributable to an
increase in fixed costs in Virginia for call center subcontractors to support
pandemic unemployment services totaling $14.6 million . Variable costs to process
credit/debit card transactions also increased, due mainly to higher IGS
transaction volumes in several states, as further discussed above.
Cost of state enterprise revenues in 2019 decreased $11.8 million , or 6%, from
2018 due mainly to a year-over-year decrease in costs from the legacy Texas
contract totaling $31.0 million . This decrease was partially offset by a 12% or
approximately $18.4 million , increase in same state costs.
Our state enterprise gross profit percentage was 40% in all periods presented.
We carefully monitor our state enterprise gross profit percentage to strike the
balance between generating a solid return for our stockholders and delivering
value to our government partners through ongoing investment in our state
enterprise operations (which we believe also benefits our stockholders).
Software and Services Cost of Revenues
In the table below, we have categorized our software & services cost of revenues
between fixed and variable costs, with the corresponding percentage change from
the prior year period:
2020 vs 2019 2019 vs 2018
(dollar amounts in
thousands) 2020 2019 2018 $ Change % $ Change %
Fixed costs $ 64,587 $ 13,169 $ 8,161 $ 51,418 390 % $ 5,008 61 %
Variable costs 30,246 28,467 8,550 1,779 6 % 19,917 233 %
Total $ 94,833 $ 41,636 $ 16,711 $ 53,197 128 % $ 24,925 149 %
Cost of software & services revenues in 2020 increased 128% or approximately
$53.2 million , over 2019, driven primarily by higher fixed costs for
subcontractors to support our TourHealth COVID-19 testing solution totaling
$51.6 million . The increase in variable costs is attributable to credit/debit
card interchange fees associated with higher payment processing volumes in
Texas .
Our software & services gross profit percentage was 26% in 2020, compared to 35%
in 2019. The lower gross profit percentage in 2020 was primarily driven by lower
gross profit margins from our TourHealth COVID-19 testing solution.
Cost of software & services revenues in 2019 increased 149% or approximately
$24.9 million , over 2018, driven primarily by higher variable costs to support
our Texas payment operations, which commenced on September 1, 2018 . The increase
in fixed costs was primarily attributable to higher costs to support our
recently acquired RxGov and NIC Licensing Solutions businesses.
Our software & services gross profit percentage was 35% in 2019 compared to 48%
in 2018. The lower gross profit percentage in 2019 was primarily driven by lower
gross profit margins for our Texas payments business.
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Selling & administrative expenses for 2020 were$34.6 million , a 2% decrease from 2019, primarily driven by executive severance costs in 2019 totaling$2.6 million , which consisted of a one-time cash payment of$1.5 million and$1.1 million of stock-based compensation expense associated with the accelerated vesting of certain restricted stock awards, as previously disclosed, and was partially offset by an increase in incentive-based compensation due to strong consolidated financial results in 2020. As a percentage of total consolidated revenues, selling & administrative expenses were 8% in 2020 compared to 10% in 2019.
Selling & administrative expenses for 2019 were
Enterprise Technology & Product Support
Enterprise technology & product support expenses were
Enterprise technology & product support expenses for 2019 were$26.9 million , a 12% increase over 2018. As a percentage of total consolidated revenues, enterprise technology & product support expenses were 8% in 2019 compared to 7% in 2018, primarily driven by higher personnel costs to support SaaS product development and enhance company-wide information technology. Depreciation & Amortization 2020 vs 2019 2019 vs 2018 (dollar amounts in thousands) 2020 2019 2018 $ Change % $ Change % Depreciation expense$ 4,103 $ 4,336 $ 5,372 $ (233) (5) %$ (1,036) (19) % Amortization expense 10,142 8,274 3,745 1,868 23 % 4,529 121 % Total$ 14,245 $ 12,610 $ 9,117 $ 1,635 13 %$ 3,493 38 % Depreciation & amortization expense in 2020 increased 13%, or approximately$1.6 million , over 2019, driven primarily by intangible asset amortization related to theComplia, LLC business acquisition inMay 2019 (renamedNIC Licensing Solutions), as well as amortization of capitalized software development costs related to SaaS enterprise product and vertical platform investments. Depreciation & amortization expense in 2019 increased 38%, or approximately$3.5 million , over 2018, driven primarily by approximately$3.0 million of intangible asset amortization related to the Leap Orbit technology acquisition (renamed RxGov) and theComplia, LLC acquisition, compared to approximately$0.5 million of intangible asset amortization related to the Leap Orbit acquisition in 2018. The increase in amortization expense in 2019 was also driven by an increase in capitalized software development costs related to SaaS enterprise product and vertical platform investments. This increase was partially offset by lower depreciation related to the legacyTexas contract. 38 --------------------------------------------------------------------------------
Interest Income
Interest income declined in 2020 compared to 2019 due to a decrease in interest earned on our investable cash balances following theFederal Reserve's emergency cuts to the federal funds rate to essentially zero inMarch 2020 in response to the COVID-19 pandemic.
Interest income was
Income Taxes
In 2020, 2019 and 2018, our effective tax rate was approximately 21.9%, 22.3% and 23.0%, respectively. The lower effective tax rate in 2020 was primarily due to lower non-deductible expenses and a lower blended state income tax rate, which was impacted by our operations in the state ofFlorida for TourHealth COVID-19 testing services allowing us to utilize certain of our net operating loss carryforwards. The lower tax rate in 2019 is primarily attributable to the release of reserves for unrecognized income tax benefits resulting from the expiration of statutes of limitations for certain tax years and from the completion of anIRS examination of our 2016 federal income tax return, which resulted in no changes to our previously filed return. For additional information, see Note 11, Income Taxes, in the Notes to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Liquidity and Capital Resources
Operating activities
Cash flows provided by operating activities were$62.8 million ,$72.1 million and$69.8 million in 2020, 2019 and 2018, respectively. The changes in net cash provided by operating activities were the result of fluctuations in working capital associated with the timing of payments to and receipts from our government partners, subcontractors and end-user consumers. In 2020, these fluctuations included TourHealth COVID-19 testing services, which commenced inAugust 2020 and, to a lesser extent, pandemic unemployment services provided to theCommonwealth of Virginia ..
Investing activities
Investing activities in 2020, 2019 and 2018 were$11.8 million ,$26.4 million and$17.5 million , respectively. The change reflects the cash paid for the Complia and Leap Orbit acquisitions in 2019, totaling$13.5 million . For additional information see Note 5, Acquisitions, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K. Furthermore, in 2020, 2019 and 2018, we capitalized$8.5 million ,$8.7 million and$8.6 million , respectively, of software development costs primarily related to ongoing investments in enterprise SaaS platform solutions and in the enhancement of our centrally managed applications for customer management, billing and payment processing that support our business operations and accounting systems. Investing activities in 2020, 2019 and 2018 also consisted of$3.4 million ,$4.3 million and$5.4 million , respectively, of capital expenditures, which were for fixed asset additions in our state enterprise businesses and in our centralized operations to support and enhance corporate-wide information technology and security infrastructure, including Web servers, purchased software and office equipment.
Financing activities
Net cash used in financing activities in 2020, 2019 and 2018 primarily reflects cash dividends paid to stockholders totaling$24.4 million ,$21.6 million and$21.5 million , respectively. The increase in 2020 was primarily due to the repurchase of shares in the first quarter of 2020 totaling$3.9 million and to a$2.8 million an increase in dividend payments.
Liquidity
We recognize revenues primarily from providing outsourced digital government
services net of the transaction fees due to the government when the services are
provided. We recognize accounts receivable at the time these services are
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provided and accrue the related fees that we must remit to the government as
accounts payable at such time. As a result, trade accounts receivable and
accounts payable reflect the gross amounts outstanding at the balance sheet
dates. We typically collect most of our accounts receivable prior to remitting
amounts payable to our government partners.
We believe our working capital and current ratio are important measures of our
short-term liquidity. Working capital, defined as current assets minus current
liabilities, increased to $257.6 million at December 31, 2020 , from $212.1
million at December 31, 2019 . The increase was primarily due to cash generated
from operating activities and an increase in accounts receivable from our
government partners and end-user consumers driven by higher revenues in 2020,
including TourHealth COVID-19 testing services and Virginia pandemic
unemployment services, offset by an increase in accounts payable to our
government partners and an increase in accrued expenses for amounts owed to
subcontractors. Our current ratio, defined as current assets divided by current
liabilities, was 2.6 at December 31, 2020 compared to 3.1 at December 31, 2019 .
As of December 31, 2020 , our unrestricted cash balance was $236.5 million
compared to $214.4 million at December 31, 2019 . We believe that our currently
available liquid resources and cash generated from operations in the future will
be sufficient to meet our operating requirements, capital expenditure
requirements and dividend payments for at least the next 12 months without the
need for additional capital. We have a $10 million unsecured revolving credit
facility (the "Credit Agreement") with a bank that is available to finance
working capital, issue letters of credit and finance general corporate purposes.
The Credit Agreement also includes an accordion feature that allows us to
increase the available capacity under the Credit Agreement to $50 million ,
subject to securing additional commitments from the bank. We can obtain letters
of credit in an aggregate amount of $5 million , which reduces the maximum amount
available for borrowing under the Credit Agreement. In total, we had $4.8
million in available capacity to issue additional letters of credit and $9.8
million of unused borrowing capacity at December 31, 2020 under the Credit
Agreement. We were in compliance with all of the financial covenants under the
Credit Agreement at December 31, 2020 . For further discussion, see Note 8, Debt
Obligations and Collateral Requirements, in the Notes to Consolidated Financial
Statements in Item 8 of this Form 10-K.
At December 31, 2020 , we were bound by performance bond commitments totaling
approximately $38.2 million on certain state enterprise contracts and other
business relationships. We have never had any defaults resulting in draws on
performance bonds.
We currently expect our capital expenditures to range from $4.0 million to $5.0
million in fiscal year 2021, which we intend to fund from our cash flows from
operations and existing cash reserves. This estimate includes capital
expenditures for normal fixed asset additions in our state enterprise and
software & services businesses including equipment upgrades and enhancements,
and in our centralized operations to support and enhance corporate-wide
information technology and security infrastructure, including Web servers,
purchased software, and office equipment. We currently expect our capitalized
internal-use software development costs to range from $9.0 million to $10.0
million . This estimate includes costs related to ongoing investments in
enterprise SaaS platform solutions and the enhancement of centrally managed
applications for customer management, billing and payment processing that
support our business operations and accounting systems.
Acquisitions
OnMay 1, 2019 , we completed the stock acquisition of Complia, a regulatory licensing platform business. Under the terms of the purchase agreement, the selling shareholders received purchase consideration of$10.0 million in cash and are eligible to receive additional consideration of up to$5.0 million . See Note 5, Acquisition, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K. Dividends We paid dividends of$0.36 per common share ($0.09 per quarter) in 2020 and$0.32 per common share ($0.08 per quarter) in each of 2019 and 2018. The total cash paid for dividends in 2020, 2019 and 2018 was$24.4 million ,$21.6 million and$21.5 million , respectively. 40 -------------------------------------------------------------------------------- OnFebruary 1, 2021 , our Board of Directors declared a regular quarterly cash dividend of$0.09 per share, payable to stockholders of record as ofMarch 3, 2021 . The dividend will be paid onMarch 17, 2021 out of our available cash. Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and debt covenants associated with our line of credit. We do not believe any of our previously paid or declared dividends will have a significant effect on our future liquidity needs.
Share Repurchase
InMarch 2018 , the Company's Board of Directors authorized a stock repurchase program allowing us to repurchase up to$25 million of common stock. DuringMarch 2020 , we purchased an aggregate of 241,180 shares under the repurchase program at a weighted average purchase price of$16.33 for a total value of$3.9 million . The remaining$21.1 million of value authorized under the repurchase program remains available for share repurchases.
Future Financing
We may need to raise additional capital within the next 12 months to further:
•fund operations if unforeseen costs arise; •support our expansion into other federal, state and local government agencies beyond what is contemplated if unforeseen opportunities arise; •expand our product and service offerings beyond what is contemplated if unforeseen opportunities arise; •fund acquisitions; •respond to unforeseen competitive pressures; and •acquire technologies beyond what is contemplated. Any projections of future earnings and cash flows are subject to substantial uncertainty. If our cash generated from operations and the unused portion of our line of credit are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or issue debt securities. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions, as well as our financial condition and results of operations at the time we seek additional financing. The sale of additional equity securities could result in dilution to our stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.
Off-balance sheet arrangements and contractual obligations
The following table sets forth our future contractual obligations and commercial
commitments as of
Payments Due by Period
Less than 1 More than
Contractual Obligations Total Year 1-3 Years 3-5 Years 5 Years
Operating lease obligations $ 12,437 $ 4,692
4,358 - 4,358 - -
Total contractual cash obligations $ 16,795 $ 4,692 While we have significant operating lease commitments for office space, except for our headquarters, those commitments are generally tied to the period of performance under related government contracts.
We have income tax uncertainties of approximately$4.4 million atDecember 31, 2020 . These obligations are classified as noncurrent on our consolidated balance sheet, as resolution is expected to take more than a year. We estimate that these matters could be resolved in one to three years as reflected in the table above. However, the ultimate timing of 41 --------------------------------------------------------------------------------
resolution is uncertain. For additional information see Note 11, Income Taxes, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
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